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Legal Technology and Smart Contracts: Contract as Code (Part I)

Artificial intelligence (AI), blockchain, and chat bots are all hot topics these days. At a spring Seattle legal technology event, computable contracts were recommended as a focus for a future event. Mark Oblad, who I have interviewed previously here has done a deep dive into this space over the past eighteen months and below is part one in a series of five pieces on contracts, smart contracts, and blockchain.

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Mary: Let’s first step back. Why you were interested in this area?

Mark: In attempt to simplify the provision of legal services, legal-tech startups have made much effort at automating the process of creating contracts and extracting document data. Many founders of these startups come from within law firms, where associates and paralegals have been tasked with wading through numerous forms to search for brackets and replace with client information, prepare signature pages, organize paper into industrial file accordions and page through banker’s boxes of documents. Most transactional associates start here, and often commiserate, “I went to law school to learn how to do this!?”

Rising in seniority means that somebody else, somebody junior, is the one left in charge of maintaining the document and on whose desk the paper lives. So, eager associates hone their skills at Microsoft Word. Ctrl + F and Ctrl + H. Search for numbers with ^#. Copy and paste style. Alt release, O release, P release.

Attorneys and paralegals become proficient at most of the process. I once worked with a paralegal who was exceptional. It was a sight just to watch him process documents for the closing of a transaction—it was as if he were playing a video game using his keyboard, and the documents were the monsters to be obliterated by firing enough bullets at them.

But even with the proficiency and the division of labor, the process is not efficient. The client with the attorney’s help has finally settled on a term sheet. The client thinks, “Great, we’ve got the deal done. Let’s get back to running the business.”

Mary: Tell us a bit more about what really happens next.

Mark: If all goes well, the proficient team will take the term sheet, translate the terms into long-form legal documents and simultaneously deliver the first draft of the documents to the client and the other side. In less ideal circumstances, the associate or paralegal making the initial go of the drafting hasn’t been able to free up from some other higher ranking deal, and when he or she finally gets the initial draft, it’s late at night at the end of the week after the promised date. And, the initial draft probably isn’t done—maybe an old version of the deal model was used; maybe those latest terms from recent changes in the law or industry practice weren’t added; maybe the signature blocks weren’t appended; maybe the styling isn’t consistent; maybe some of the documents are missing. So, to fix it all, the reviewing attorney takes each of the documents and reads them carefully as he or she should. The problem is that the reviewing attorney is now doing a hand markup of the document: hand-writing the provisions from the last deal, drawing the signature blocks, writing in corrected numbers from the updated model. No Ctrl + F or Ctrl + H. No copy and paste. And, both the drafter and the reviewer have expended their limited mental attention on process, only to have to review the drafts for substance once again when their brains have recovered.

Then there is negotiation of finer points in the long-form documents. The drafting side is likely to serve up a version of the documents with all of such points weighing in favor of their client (anchoring), aptly expecting that the other side will also stake out a position in the opposite direction equally offset from the yet-unknown agreeable middle ground. After a few rounds of the dance, and perhaps conference calls, re-drafts, redlines and reply-all emails, the language is settled.

Mary: As you say, this is less than ideal. What are some of the noteworthy attempts to solve the problems outlined above?

Mark: Innovators have taken various approaches to streamline negotiated transactions, ranging from using available tools to script out the logic for complex transactions, to building complex document automation tools, to attempting to eliminate documents altogether.

Mail Merge and a Spreadsheet

Anybody that has ever done a mass mailing probably has used Microsoft Word’s mail merge tools with a Microsoft Excel file containing a list of recipients. For each recipient, the Excel file contains one row with the name, salutation, address and other simple information that needs to go into the merge file. The merge file is the Microsoft Word document with snippets of code inserted to indicate where the data is to be interleaved into the document. Running the merge outputs one letter for each recipient.

This works beautifully for simple, non-conditional, non-nested data, and a long list of recipients. It doesn’t, however, work for an individual form with optional language blocks, optional paragraphs, optional exhibits and embedded lists.

Wilson Sonsini made one of the first valiant efforts at automation with their term sheet generator This might have been a bit of a brute-force approach, though. The subject of the tool was a term sheet for a venture financing, probably one of the more complicated of the routine deals done by transactional law firms, measured by number of negotiated points. The term sheet is meant to summarize all the major terms of the transaction, so as to minimize negotiation and re-drafting of the more detailed language in the long-form documents. Wilson Sonsini’s term sheet generator carefully describes the deal points one-by-one, taking the user through a 49-step wizard (and page reloads), and outputs the 14-page Word document. While certainly a more efficient process, it still took me 45 minutes to get through the steps, even though I was just trying it out.

A similar approach has been taken by law firms aiming to create good will, lure founders and increase their internal efficiency. Tools such as Cooley’s COOLEY GO; Goodwin Procter’s Founders Workbench and Perkins Coie’s Startup Percolator, have been made available on the web and allow founders to generate and download documents, and in some cases, sign the documents electronically. Separate versions of the tools may also be used internally to cover a wider set of transactions. Typically, the data from the web versions is periodically wiped clean from the platforms; internally, the data may be stored for later potential unknown re-use, but typically is not added to on ongoing company model.

Super Simple Wizard + Simple Documents

Others have taken an ultra-consumer-focused approach. ShakeLaw by LegalShield and LegalZoom, for example, provide very simple forms of agreements through web and mobile apps, walking the user through bite-sized question-and-answer screens to complete the document. In some cases, such forms may be too simple for an attorney’s liking, but this process is effective at extending legal services to the “underserved,” whose preference is for the right type of agreement that is good enough rather than the perfect agreement.

Because many forms are meant to cover a variety of circumstances, automating a form with a simple merge tool may require rewriting the variations within the form to generalize the language, or creating a separate form for each of the principal variations. Consider that Y Combinator’s Simple Security for Future Equity (the SAFE), while a very short agreement, has four variations to pick from, notwithstanding that the content of each variation is probably 90% the same. Similarly, 500Startup’s Keep It Simple Security (KISS) has two variations. Both the SAFE and the KISS are frequently made available with simple automation tools.

Web Forms

Some documents, such as nondisclosure agreements, may be simple enough that only a few pieces of information need to be inserted into the document—the party names, the date, a dollar amount, etc. The steps include:

convert the document to HTML(hypertext markup language) to allow for display online;

make inputs for the needed data;

position directly on the web document;

allow the user to enter the data in place; and then

export the merged document.

Docracy is probably the leading solution at this approach. Docracy also has a deeper level of flexibility, however, allowing the form to be edited inline, and providing an open history of inline edits using proprietary redlining/diffing algorithms—sort of a Wikipedia of legal documents.

Thank you, Mark, for sharing this important background to prepare us for the next installment where we deconstruct contracts. Mark would like to give special thanks to the following individuals for insight, comments, and corrections for this Part I and the remainder of the series Robert V. Gunderson, Jr. of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian; Greg Raiten of FirstMark Capital; Matt Hall of Docracy; David Rose of Gust; Ned Gannon of eBrevia; Ben Whetsell of Paper Software; Kyle Mitchell of Common Form; Sergey Nazarov of smartcontract.com; Jasmine Castro-Torres of HelloSign; and Jason Boehmig of Ironclad and Series Seed. #onwards.

I am the founder and CEO of Traklight, the only self-guided software platform that creates your custom intellectual property (IP) strategy and assesses business risk. I

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I am the founder and CEO of Traklight, the only self-guided software platform that creates your custom intellectual property (IP) strategy and assesses business risk. I dedicated my more-than-30-year career to helping businesses achieve and protect their success, specializing in transition or start-up phases and helping companies create sustainable financial growth. I want entrepreneurs to have Fortune 500 style software solutions. I cover IP issues and business risks to prevent horror stories and help businesses succeed. In 2015, I co-founded Evolve Law to accelerate the adoption of technology within the legal industry and in addition, I am a LegalShield Access Advocate. I have a Bachelor of Commerce degree from McGill and a Juris Doctorate from Arizona State as well as my US and Canadian public accountant certifications. I am an international writer, speaker, and mentor, and sit on the ABA Group Legal Services Association board. I previously represented entrepreneurs on the Board of the Crowdfunding Investment Regulatory Advocates and the Licensing Executive Society (LES) Emerging Enterprises committee. I am the principal attorney at Juetten Law and is Of Counsel to Nimbus Legal. I am the author of The Business of Legal: The Data-Driven Law Practice.